Opportunities for Acquirers: Decreased Rates and Increased Capacity in the Representations and Warranties Insurance Market

The process of procuring Representations and Warranties Insurance (“RWI”) has been significantly impacted by all the same factors that weighed on the M&A market in 2023. For potential acquirers (strategic/corporate and private equity alike), this means that now is a better time than ever to explore RWI coverage options when structuring your deals:

1. After an extended period of rising RWI insurance rates in recent years, the cost for RWI has significantly decreased over the last 18 months. Previously, rates were 3.5% - $4.5%+ rate on line (or % of premium against the limit). Today, pricing is in the 2.25% - 3.25% range. We have seen recent deals insured at nearly half of what it would’ve cost to insure the same transaction in the frenzy of 2021.
2. The RWI insurance market has excess underwriting capacity due to the decreased M&A activity. At the peak of M&A activity in 2021, when submitting a typical deal to the RWI market, we would expect to receive ~5-10 terms from insurers. On competitive deals this year, we’ve received upwards of ~15-20 insurer options (depending on the risk). This increased competition amongst carriers allows for negotiating even more insured‑friendly terms for clients than in prior years. There has also been a dramatic difference in the market’s increased willingness to insure smaller deals (e.g., $20-50M), which have historically been less appealing to many RWI insurers.
3. Since there is excess capacityin the RWI insurance markets, insurers are getting creative on how to win deals. In 2023, we witnessed a trend of carriers lowering their initial and drop-down retentions (deductibles) on RWI policies. The standard initial retention for middle-market deals has been, for many years, 1% of the target’s enterprise value. We currently receive terms with initial retentions ranging from .5% to .75% of the target’s enterprise value. These lower initial retentions mean that the threshold to recovery can be significantly lower in the event of an RWI claim than in years past.

If you are interested in learning more about RWI or current market conditions, please contact our team at assuredpartnersrwi@assuredpartners.com.